Comerica 2008 Annual Report Download - page 119

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comerica Incorporated and Subsidiaries
loss are included in the assessment of hedge effectiveness. Net hedge ineffectiveness is recorded in ‘‘other
noninterest income’’ on the consolidated statements of income.
The following table presents net hedge ineffectiveness gains (losses) by risk management hedge type:
Years Ended
December 31
2008 2007 2006
(in millions)
Cash flow hedges .................................................. $— $1 $1
Fair value hedges .................................................. 92—
Foreign currency hedges ............................................. ———
Total ......................................................... $9 $3 $1
As part of a fair value hedging strategy, the Corporation has entered into interest rate swap agreements for
interest rate risk management purposes. These interest rate swap agreements effectively modify the
Corporation’s exposure to interest rate risk by converting fixed rate debt to a floating rate. These agreements
involve the receipt of fixed rate interest amounts in exchange for floating rate interest payments over the life of
the agreement, without an exchange of the underlying principal amount.
During 2008, the Corporation terminated an interest rate swap with a notional amount of $150 million that
was designated as fair value hedge. The pre-tax gain of $35 million realized on the termination will be recognized
in net interest income over the remaining life of the related debt (15 years). The swap was replaced with another
interest rate swap with a notional amount of $150 million with a different counterparty.
As part of a cash flow hedging strategy, the Corporation entered into predominantly two-year interest rate
swap agreements (weighted average original maturity of 2.2 years) that effectively convert a portion of its existing
and forecasted floating rate loans to a fixed rate basis, thus reducing the impact of interest rate changes on future
interest income over the life of the agreements (currently over the next 27 months). Approximately three percent
($1.7 billion) of the Corporation’s outstanding loans were designated as hedged items to interest rate swap
agreements at December 31, 2008. For the year ended December 31, 2008, interest rate swap agreements
designated as cash flow hedges increased interest and fees on loans by $24 million, compared to a decrease of
$67 million for the year ended December 31, 2007. If interest rates, interest yield curves and notional amounts
remain at their current levels, the Corporation expects to reclassify $20 million of net gains, net of tax, on
derivative instruments that are designated as cash flow hedges from accumulated other comprehensive income
(loss) to earnings during the next twelve months due to receipt of variable interest associated with the existing
and forecasted floating rate loans.
Foreign exchange rate risk arises from changes in the value of certain assets and liabilities denominated in
foreign currencies. The Corporation employs cash instruments, such as investment securities, as well as
derivative instruments to manage exposure to these and other risks. In addition, the Corporation may use foreign
exchange forward and option contracts to protect the value of its foreign currency investment in foreign
subsidiaries. Realized and unrealized gains and losses from foreign exchange forward and option contracts used
to protect the value of investments in foreign subsidiaries are not included in the statement of income, but are
shown in the accumulated foreign currency translation adjustment account included in other comprehensive
income (loss), with the related amounts due to or from counterparties included in other liabilities or other assets.
The Corporation did not hold any forward foreign exchange contracts recognized in accumulated foreign
currency translation adjustment during the years ended December 31, 2008 and 2007.
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